Elon Musk’s Battery Day – Implications for Lithium Investors

October 19 2020, 15:45 GMT+01:00

Depending on if you are a bull or a bear, you will have a completely different reading of Elon Musk’s battery day, held on September 22nd, 2020. On the one hand, some Australian lithium stock prices fell. On the other side of the aisle, Musk presented some compelling reasons to buy into the lithium macro story. It is a contentious area of debate.

Around 300,000 individuals tuned into Elon Musk’s Battery Day, as the South African-born American entrepreneur delivered a presentation that felt like a scientific lecture. Musk is a name followed with loyalty by many retail investors, and Tesla’s status at the forefront of deriving range from EV battery cells has placed them at the front of the pack, at least in terms of sales. There was a lot of hype in the build-up to the event, with Musk promising some major “insane” developments, and he didn’t appear to disappoint some viewers.

Musk presented a series of innovations. However, some investors were disappointed because Tesla's widely discussed plans to develop a “million mile” battery that could last an electric car’s entire lifetime on the road were not part of the presentation, and this is probably the main reason that Tesla shares fell by 10% in the aftermath of Battery Day. Some impressive objectives for the future included plans to dramatically reduce the cost of the company’s battery cells and packs to $100 per kilowatt-hour: a figure that would drive EVs down towards a comparable price point with conventional, combustion-engine vehicles. Could we really see a $25,000 Tesla EV within 3 years? 

However, despite these positive themes, some lithium commentators have been left feeling flat. Some investors even offloaded the stock of Australian lithium players. Centrally, we believe this caution has been induced by a lack of clarity. One might not go so far as stating that Tesla’s plans lacked focus, but the lack of specifics and swathe of new ideas have created uncertainty, and this is rarely a good thing in the short term for market sentiment. 

Tesla plunged into uncharted waters in this event, but isn’t this exactly what we have come to expect from one of the world’s leading innovators? It appears there are a few proposals in particular that have left investors struggling to knit the lithium macro story together; these include a plan to manufacture Tesla’s own battery; a plan to process the raw materials; and even a plan to produce its own lithium. The optimistic investor may have been excited by this progress, but some pragmatists saw this as a hodgepodge of promising but directionless ideas. Vivas Kumar, Tesla’s former battery supply chain manager and currently a principal at Benchmark Mineral Intelligence, echoed this mood in a post-Battery Day webinar, stating “I came out of it with a confused message about what they’re doing with the [battery] supply chain.”

While Musk and co-presenter/engineering boss, Drew Baglino, presented this series of materials, processes and production targets with a great deal of energy and enthusiasm, the response was a 7% fall for Tesla shares. John Forwood, portfolio manager at the Lowell Resources Fund, has been quoted as stating "Rather than trying to pick battery chemistry – is it going to be cobalt, is it going to be titanium, is it going to be tin or zinc or whatever? Every month, there's a new battery chemistry that gets touted." Musk has been left frustrated at the lack of media coverage around the event. 

Another message that hasn’t been interpreted with uniform positivity is Tesla’s presentation of lithium as a raw material. In fact, while Tesla presented lithium as an extremely important element to the EV supply chain, the soft and shiny, silvery alkali metal was exhibited as a ubiquitous material. Musk stated that "It’s important to note that there is a massive amount of lithium on earth. Lithium is not like oil – there’s a massive amount of it pretty much everywhere." In fact, Musk argued there was enough lithium in Nevada alone to provide battery power for the entire North American EV fleet, which was reinforced by a statement from Mr. Baglino, "There really is enough lithium in Nevada alone to electrify the entire US fleet." 

Consequently, Tesla has taken the first step into the world of mining, securing the rights to a 10,000-acre lithium clay deposit in Nevada. However, “There has never been any commercial production of lithium clay sources” according to Chris Berry, president of House Mountain Partners and an analyst who focuses on energy metal supply chains. Musk’s position is that lithium can be extracted from Nevadan clay deposits using only water and salt. Most of the world’s lithium comes from two places: lithium brine deposits in South America’s 'lithium triangle' of Argentina, Chile, and Bolivia; and hard-rock deposits in Australia. The processes behind these 2 sources of production are well known. If Musk’s assessment of the situation is correct, it begs the question: why haven’t we been doing this all along? Then again, Musk has proven the doubters wrong many times before.

What does all of this mean for lithium mining companies?

As previously mentioned, some Australian lithium mining companies took a hit in the wake of Battery Day. Galaxy Resources dropped 11.6%, Orocobre shares dropped 6.5% and Pilbara Minerals dropped 6.8%. Moreover, battery tech player, Novonix, fell 11.6% after speculation that it may be revealed as a technology provider to Tesla failed to materialise. 

After oversupply of primarily Chinese-grade lithium created price depression, lithium has been on a downwards trajectory, but it remains an integral part of the EV solution.

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According to Statista, lithium carbonate equivalent (LCE) demand will nearly triple by 2030. With aggressive subsidies being discussed across Europe and North America, and with major vehicle manufacturers investing billions in EV infrastructure, it seems that the way could be paved for a major lithium boom. Volkswagen recently claimed that lithium is the “Irreplaceable Element of the Electric Era." Because of the depressed lithium price, there hasn’t been a great deal of recent investment into new lithium projects. Therefore, if one buys into Tesla and Musk’s innovations, the lithium macro story, and if they believe that independent lithium mining companies will have to help plug the supply-demand deficit, it could be time to choose a lithium winner.


The Lithium Outlook

If lithium does indeed get dragged out of the doldrums by a wave of EV demand, investors may want to consider making their entry now rather than missing out on some major gains.

In terms of lithium juniors, investors will find their options somewhat limited. There are not a lot of new, low-cost, fully permitted lithium projects with sufficient scale to appeal to strategic partners and the grade to slot into the EV supply chain. Moreover, many lithium projects are currently on care and maintenance waiting for the lithium price to recover.

Lithium is a small and nuanced space. However, in light of Statista’s LCE demand projection, and with some analysts expecting EV penetration to be 25% by 2030, the market could grow quickly. In 2019, lithium chemical sales reached around 300,000t, with an average sale price of approximately $10,000/t. This equates to $3Bn in revenue. If lithium does indeed grow by 15-20% per year, demand could reach the heights of 2Mtpa by 2030, though Millennial Lithium’s CEO, Farhad Abasov, thinks a conservative demand figure of 1Mtpa by 2025 is more reasonable.

As far as current lithium supply, around 65% of lithium chemicals get processed in China, and this includes 80% of the highest-purity, highest-value, battery-quality lithium hydroxide. China sources some of its lithium from LCE exports from Chile and Argentina. The majority of raw lithium material comes from hard rock spodumene deposits in Australia. Some analysts have argued the lithium supply chain lacks diversification, and with national governments starting to consider lithium’s strategic credentials, this could change in the near future. Moreover, with the lithium supply chain set up in its current form, ESG issues become apparent. Companies struggle to control their carbon footprint when lithium imports have to be sourced from two potentially obscure locations rather than closer to home.

In the short term, COVID-19 has created a short-term reduction in EV demand because many consumers have cash flow issues. Now is not the ideal time to invest in an expensive, unfamiliar vehicle. The statistics emphasise this consumption tail-off, with car sales falling by 70-80% in H1/20.

However, these sales could be boosted by subsidy packages. In July, the Chinese government announced that it would extend its reinstated EV subsidies package until 2022. The Chinese government will be installing 78,000 new charging or supercharging stations for EVs over the next few years. It is clear that momentum is growing and lithium could benefit.

Choosing a Lithium Winner – A Case Study  

There are 3 lithium brine companies that could have the potential to do well. Lithium Power (ASX: LPI); NeoLithium (TSX-V: NLC); and Millennial Lithium (TSX-V: ML). Today, we will discuss one of them. Look out for articles on the others coming soon.

Let's explore the investment proposition presented by Millennial Lithium. There are several articles regarding the company on the Crux Investor platform. Feel free to check them out, along with all of our different interviews.

Millennial Lithium’s flagship project is called Pastos Grandes. It is located in the Salta province in the lithium triangle region of Argentina. SQM, Albemarle, Livent Corp. and Orocobre all produce lithium in the region. Pastos Grandes is one of the most advanced lithium development projects in the world. It is a high-grade, lithium brine asset. The project is in the lowest cost quartile for production, and the 2019 feasibility study exhibits favourable economics:

  • Proven Lithium Carbonate Equivalent (LCE) reserves of 179,000t.
  • Probable LCE Reserves of 764,000t.
  • Robust economics for a 24,000t/y battery-grade LCE operation.
  • An entirely reasonable CAPEX of US$448M.
  • An OPEX of US$3,388/t of LCE.
  • An NPV(8%) of US$1,030M.
  • An IRR of 24.2%.
  • A substantial c.100,000t pa potash by-product (4 potash: 1 lithium), which produces an additional US$25M in revenue.
  • A projected mine life of 40 years.

The Pastos Grandes production model is divided into 2 stages. From years 1-6, the start-up stage of production will occur. From years 7-40, the main mining stage will take place. The CAPEX is modest enough to attract institutional investment, and the mine life and scale of the project may both be appealing to major institutions like Tesla. The potash component provides a degree of diversification and de-risks the project.

Millennial Lithium had been waiting for its Environmental Impact Assessment (EIA) to be approved by the Argentinian government for over a year. This had negatively affected shareholder sentiment, but many will have been aware of the nature of protracted permitting timetables in Latin America. However, having recently got its EIA over the line, Millennial Lithium is now poised to focus on arranging financing for Pastos Grandes on favourable terms.

This is one of a handful of projects worldwide that have been permitted to this level, and CEO Abasov expects a major investor to come in by the end of the year following the conclusion of Millennial’s off-take agreement. With funding groups in the data room, investors can expect the deal to feature a combination of strategic investment, investment from off-take groups, debt and other equity investors.

What do you make of the latest development in the lithium space. Can Millennial Lithium be one of the few lithium juniors to make it into production? Comment your thoughts below and we will respond. Be sure to check out the Millennial Lithium website for the latest updates regarding the company's progress at Pastos Grandes. 


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